Union Budget 2025: Personal Income Tax Expectations

The Union Budget 2025, scheduled for February 1, 2025, has generated considerable anticipation among taxpayers and financial experts. A primary area of focus is the personal income tax framework, with widespread expectations for simplification and reductions. Such reforms are seen as vital in increasing disposable incomes, boosting consumer spending, and fostering overall economic growth.

Simplification of the Tax Structure 

The current personal income tax system in India comprises multiple slabs and exemptions, which can be complex for the average taxpayer. India presently operates under two personal income tax regimes:

• Old Tax Regime: Was the only option until 2020. There are several exemptions and deductions that you can claim under this regime, such as Sections 80C and 80D, etc.
• New Tax Regime: Introduced just a few years ago, it offers reduced tax rates. However, the new regime does not consider most of the exemptions and deductions of the old regime. This is the ‘by default’ tax regime for all individual taxpayers until the old regime is voluntarily chosen.

Taxpayers have found choosing between these regimes challenging due to the complexity involved in evaluating benefits. While both the regimes have their advantages and limitations, simplifying this structure is a key expectation from Budget 2025. For example, harmonising tax slabs between the two regimes can reduce confusion and make the system more transparent. Moreover, introducing certain deductions or benefits within the new regime are likely to increase its adoption among taxpayers.

According to EY India, the budget should prioritise tax simplification to improve taxpayer services, reduce litigation, and enhance compliance. 

Reduction in Personal Income Tax Rates  

Another significant expectation is the reduction of personal income tax rates, especially for lower and middle-income groups. Such measures are anticipated to stimulate demand by increasing disposable incomes. 

Potential adjustments in this regard could be:

• Increasing the Basic Exemption Limit: Raising the threshold income level that is exempt from tax, thereby benefiting a larger segment of taxpayers. It is presently ₹ 2.5 Lakhs and ₹ 3 Lakhs in the old and new tax regimes, respectively. Proposals have been presented to the Ministry of Finance to raise these by ₹ 2 lakh each.
• Adjusting Tax Rates: Lowering tax rates for specific income brackets to reduce the overall tax liability for individuals. In the bigger picture for the economy, reducing rates for certain income brackets can increase disposable income, leading to higher consumer spending.

Enhancement of Deductions and Exemptions 

To further reduce the tax burden, there is an expectation for the enhancement of existing deductions and exemptions. For example, increasing the deduction limit under section 80C would encourage savings and investments. At present, most long-term savings instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity-Linked Savings Schemes (ELSS) are included together under a single section with a combined cap of ₹1.5 lakhs only.

Another possible improvement could be an increase in the standard deduction for salaried individuals to account for inflation and rising living costs, especially in urban India.

Addressing Capital Gains Taxation 

The current capital gains tax structure, which underwent a change in July 2024, is considered complex, with varying holding periods and tax rates for different asset classes. Simplifying this structure is another expectation from the budget. Many tax experts advocate rationalising the capital gains structure in terms of holding periods and tax rates.

Proposed changes include:

• Uniform Holding Periods: Standardising holding periods across various assets to simplify tax calculations.
• Consistent Tax Rates: Implementing uniform tax rates for similar asset classes to reduce complexity and potential disputes.
• Reintroducing Indexation Benefits: For assets like debt mutual funds, restoring indexation benefits can make investments more attractive and equitable

Enhancing Taxpayer Services and Reducing Litigation 

According to media reports, there is over ₹31 lakh crore stuck in income tax disputes as of 2023-24. Hence, there is an urgent need to clear the backlog and bolster alternate dispute resolution mechanisms. The government is working on simplifying the Income Tax Act and is encouraged to follow a consultative approach, inviting public comments on draft proposals.

The anticipation for reforms in personal income tax is always high before the presentation of any Union Budget, and this time is no different. Implementing the aforementioned reforms could potentially lead to increased compliance, higher disposable incomes, and a stimulated economy. It remains to be seen how the government addresses these expectations to balance fiscal responsibility with the need for economic growth.

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